As a broker, you have the fiduciary duty to protect the accounts of your customers. Part of your duty is making sure you have their approval before making any transactions. Some of your customers may enter into agreements that allow you to proceed without consulting them beforehand. In most cases, though, you could face the consequences for doing so.
Situations where customer permission is unnecessary
There are two situations in which you, as a broker, can conduct transactions without a customer’s permission.
- A customer holds a discretionary account. This type of account gives you the power to make transactions without consulting the customer. The customer, though, must give you written authorization to do so. And they can set limitations to your ability to make unauthorized transactions as well.
- A customer holds a margin account, and its value has fallen beneath your firm’s maintenance requirements. In this case, you can sell the customer’s securities without their authorization.
Why customer permission matters
Unless your customer has a discretionary account or has fallen below the maintenance requirement on a margin account, you must consult them before making a transaction. Under the rules of the Financial Industry Regulatory Authority (FINRA), brokers cannot make transactions without a customer’s permission.
If you do, your customer will likely notice this activity in their account, whether the transactions caused them financial losses or not. By neglecting to consult your customer about these transactions, you have breached your fiduciary duty to them. As a result, they may file a claim against you through FINRA or the Securities and Exchanges Commission. Often, these claims resolve through arbitration.
If a customer has filed a claim against you for making unauthorized transactions, you will want to consult a defense attorney to understand your options for moving forward.